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Challenger has grown from just being one of the fragmented players in the market in 1984, to commanding a sizable network of 42 outlets today.

Because of the variety of products carried in its stores, and the strategic locations Challenger opens its stores at (think CapitaMall Trust), human traffic translating to store sales are pretty much a given.

But let me go to the top three things I like about Challenger.

Expansion Supported By Good Numbers
Expansion without further sales and better results basically just derails what a good expansion plan can do for a company.

If you look at the charts below, Challenger’s profitability metrics are in line with the growth seen in its number of stores.

Source: Annual Report

This not only endorses the effectiveness of the stores as a wider point of sales, it also means that same store sales are doing better.

Source: Annual Report

Interestingly, if you remembered 2008 and 2010 being the bad years (lehman crisis and Eurozone), you would have realised profits and sales from its IT retail segment still performed well.

Zero Long Term Debt, Superior Efficiency
Initially, I was quite surprised that Challenger doesn’t have any long term debt. Considering how much it is expanding, and as a retailer, I initially thought it would have some traces of long term debt.

But so far it’s clean. Digging deeper, you would’ve realised Challenger manages its cash cycle very well, and it’s almost looking like great clockwork for using sales generated to pare off existing liabilities when they arise.

This is evidenced in the numbers tagged under its Accounts Receivables, Inventory, and Payable days.

Source: Annual Report

The inventory turnover basically means that on average, items fly off the shelf within 30 days, mitigating the risk for inventory write down.

It also subtly conveys the power of sales, although much limelight is still given to good inventory management.

The low accounts receivable days (below 10!) suggests very good trade receivables management, and mitigates possibilities of huge doubtful and bad debts.

This shows a very good credit policy in place between Challenger and its trade receivables and for a company that also provides corporate sales, where credit purchases are common, I am impressed by this.

Not to forget, the significant reduction in its payable days also puts Challenger in a sweet spot to get good credit purchase terms from its suppliers.

Judging from the difference between its receivable days and payable days, it is clear that Challenger is maximising this credit facility to its full potential, while still keeping its suppliers happy.

ValueMembers Play, Dividend Yield
In business schools, we learned that it is 6 times more expensive acquiring new customers, than to retain your existing ones.

On this front, Challenger has a huge base it can tap on, and is doing a good job on keeping.

Ever seen the discount given to you and the value bundles you get if you’re a challenger member?

It makes more sense for someone to sign up to become a member and continue being one. This is precisely why Challenger’s ValueMembers base has been growing significantly over the years.

As of end of 2013, as seen from the chart below, Challenger has got a base of 500,000 ValueMembers, where it can tap on for recurring sales.

Source: Annual Report

If you refer to the sales growth seen in the first part of this article, clearly, this base is contributing to the sales growth, and in a good recurring way.

Lastly, Challenger currently commands a dividend yield of 5 percent. It has, for the past 5 years, paid out its dividends to shareholders at a consistent payout ratio of some 40-50 percent.

Not too bad for a retailer if you ask me.

Investment Merits

Expansion of business supported by good profitability numbers

Good efficiency management by management, minimising cash flow issues

Strong cash chest that will be able to support expansion plans or pare off any existing obligations

Superior point of sales from its stores

Strong base of customers for re engagement possibilities

5 percent dividend yield

Investment Risks

Low margins on line of products carried

Increasing operating expenses that could eat into profits

Paradigm shift of consumers buying habits to online shopping

Extreme competition in online sales arena

Risk of Valore brand and products not doing well

SI Research Takeaway
I must say I was impressed by Challenger’s ability to grow, not just in terms of reach, but revenue and profit dollars.

For a retailer, cash flow is always the biggest concern, and it seems to be managing this very well.

Topping this off with a 5 percent dividend yield with such track record, I can’t say I’m not tempted to list them in my radar for tracking purposes.

Louis is a qualified accountant with the ACCA, and is the Research Editor at Shares Investment magazine.

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